Money and Property Rights

By J. Bradley Jansen and Matt Sekerke

web posted March 11, 2002

An important test faces Congress and President Bush: Will we move back toward the
Rule of Law and respect for contracts and property rights – or does our government
still not know what the meaning of "is" is? Whether or not they abide by US law
and oppose International Monetary Fund efforts to use our taxpayer dollars to
reward theft through the voiding of Argentina's monetary contract will be a key
harbinger. The other option is to encourage Enron-style financial incentives for
fraud.

When Argentina's president Eduardo Duhalde unilaterally abandoned the currency

board monetary system and devalued the peso, he hurt American and other investors.
Under a currency board, notes and coins are fully backed by assets in a foreign
anchor currency and are fully convertible into the anchor currency at a fixed
exchange rate on demand ("Should Developing Countries Have Central Banks?" by Kurt
Schuler, Institute for Economic Affairs, 1996). Thus, a currency board provides a
guarantee to a noteholder: He or she may always exchange the note for an
equivalent amount of the reserve currency.

Even the IMF has lauded the guarantees of currency boards, "Demand is higher for a
‘currency-board currency' than for currencies without guarantees because holders
know that, rain or shine, their liquid money can easily be converted into a major
foreign currency". There was no IMF doubt that currency boards provide a
contractual guarantee for investors.

The good news is that Americans as taxpayers should not support a government that
steals money from Americans as investors. U.S. law (Title 22, section 2370a)
clearly says, "The President shall instruct the United States Executive Directors
of each multilateral development bank and international financial institution to
vote against any loan or other utilization of the funds of such bank or
institution for the benefit of any country" that has expropriated the property of
any U.S. person, nullified any contract with any U.S. person, or taken any other
action which has the effect of seizing ownership or control of the property of any
U.S. person. The provisions apply until the country in question has made
restitution or has provided for a suitable remedy such as arbitration under
international law.

The only question now is whether Congress and the president will uphold U.S. law
or permit US taxpayer money to the IMF to reward thieves. Lawmakers should also
focus on the IMF's failure to identify the sources of the crisis, and their role
in sanctioning the events that led to it.

From April 1, 1991 to January 6, 2002, Argentina's central bank employed a

currency board-like system called convertibility which maintained a fixed exchange
rate of 1 peso to 1 US dollar by holding US dollar reserves equal to outstanding
peso monetary liabilities. Investors put money into Argentina under those clear,
legal conditions.

When Domingo Cavallo became Economy Minister in March 2001, he introduced a series
of measures which put the currency board guarantee in question. Markets
interpreted these proposals as preludes to devaluation, pushing interest rates up
and driving capital flight from Argentina. As confidence in the Argentine system
deteriorated, the IMF should have encouraged Argentina to restore credibility by
either adopting a more orthodox currency board or by officially dollarizing. The
IMF did neither. In fact, as events unfolded, they did exactly the opposite.
The panic began on April 17, 2001, when Cavallo proposed substituting euros for
half of the reserve backing of Argentina's currency board-like system.

The IMF did not react.

On May 21, IMF Managing Director Horst Köhler said he welcomed Argentina's efforts
for a debt swap it claimed would support medium-term financing sustainability.
Eleven days later, Minister Cavallo engineered a swap that obliged Argentine banks
to exchange relatively good, liquid government bonds for new longer-dated,
illiquid paper. The central bank was obliged to inject liquidity into the banking
system (a feature which is not present in orthodox currency board systems), which
greatly expanded the monetary base and reduced dollar reserve backing of the
currency below 100 per cent for the first time.

Soon after, on June 15, Minister Cavallo announced a dual exchange-rate regime:
one for imports and another for most exports. When markets worried again about
devaluation, interest rates spiked and capital flowed out of Argentina. A week
later, IMF Director of External Relations Thomas Dawson told a press conference
that the IMF continued to support Argentina's efforts.

By September 7 last year, three events had occurred, with the IMF's approval,
which seriously compromised the credibility of the convertibility system.
Predictably, this did not stop the IMF from augmenting Argentina's stand-by credit
to $21.57 billion. IMF First Deputy Managing Director Anne Krueger appeared
utterly oblivious in a press release, saying: "The [new Argentine] program aims at
restoring the credibility of the fiscal position and the convertibility regime."

At the end of November, Mr. Cavallo further undermined the convertibility system
by requiring banks to exchange treasury bills for illiquid new ones. As a result,
banks could not meet demands for deposit withdrawals, so he instituted
restrictions on deposit withdrawals and transfers of funds abroad. A week later
Thomas Dawson informed us "there is no Fund staff view on the subject."

Dissatisfaction with these measures led to rioting and a revolving-door political

crisis, producing five presidents in two weeks. Eduardo Duhalde became Argentina's
fifth president on January 1, 2002, and ended convertibility five days later. He
broke the monetary contract and created a new exchange-rate regime which stole
about 40 per cent of the value of the peso—similar to FDR's breaking our domestic
gold standard contract and devaluation.

This ended the legal right of people to convert pesos into dollars, amounting to
outright theft of the central bank's foreign reserves. Duhalde's administration
proceeded to violate contracts with foreign companies, steal the dollar deposits
of Argentines, and wreak havoc on the banking system. Since Argentina's
devaluation, all eyes have been on the IMF to come to Argentina's aid. And the
Duhalde administration is already penciling in a bailout package to support its
budget.

The Congress must demand that President Bush follow the law and oppose any new IMF
lending to Argentina until it honors its contracts. They should also oppose
additional disbursements to the IMF based on the IMF's failure to respond to the
unfolding crisis. If the IMF cannot focus on basic contracts, property rights and
monetary stability—instead of its new pet projects of higher taxes and less
financial privacy—taxpayers would be better served if we gave our notice of
withdrawal to the IMF and put our returned deposits to better uses.

J. Bradley Jansen is Deputy Director of the Center for Technology Policy of the
Free Congress Foundation. Matt Sekerke is a Research Associate at the Johns
Hopkins Institute for Applied Economics and the Study of Business Enterprise.